ECON 100 Lecture 21 Monday, April 28

Midterm Exam #2 Friday, May 16, 6:30 P.M.

A few key points from last lecture © 2007 Thomson South-Western

This is Michael Dixon, an experienced software test engineer This is Michael Dixon, an experienced software test engineer. As of June 2012, he hasn't had a job since September 2011. Quiz: Is Michael unemployed as of June 2012? Please explain your answer.

Labor Force Statistics The adult population (15 or older) is divided into 3 groups: employed: paid employees, self-employed, and unpaid workers in a family business. unemployed: people are not working now but have looked for work during previous 3 months. (4 weeks in Europe and US) not in the labor force: everyone else in the adult population.

Labor Force Statistics Labor force = 1 + 2: Labor force is the sum of the employed and unemployed workers. (Labor force = employed + job searchers). Employed: paid employees, self-employed, and unpaid workers in a family business. Unemployed: people are not working now but have looked for work during previous 3 months.

Unemployment rate and labor force participation rate Unemployment rate (the “u-rate”): % of the labor force that is unemployed u-rate # of unemployed labor force = 100 x Labor force participation rate: % of the adult population that is in the labor force labor force participation rate labor force adult population = 100 x

Unemployment rate in Turkey

1988 – 2012

2013 - 2014

Labor force participation rates in Turkey

1988-2006 Year LFPR Agriculture

Labor force participation rates, selected countries, 2005

Quiz #2 The adult population in 2014 is estimated to be 56 million (in Turkey). Fill in the missing parts below to the best of your knowledge (guess, make up some numbers and round them to the nearest million) employed: ________ million unemployed: ________ million and compute the unemployment rate. Also compute the labor force participation rate.

A little bit of theory

Why are there always some people unemployed?

Why Are There Always Some People Unemployed? In an ideal labor market, wages adjust to balance the supply and demand for labor In equilibrium all workers who are willing to work at the existing wage rate are employed. Labor Supply Wage Labor Demand WE QE Quantity of labor

All countries always experience some unemployment. Two observations All countries always experience some unemployment. The unemployment rate fluctuates from year to year. Unemployment is a serious and complicated problem with a variety of causes. To most effectively address such a problem, we need to break it down and look at each cause separately. We begin by noting that the causes of short-run fluctuations in unemployment are different than the causes of the long-run average unemployment rate, called the “natural rate of unemployment.” The next slide shows data on both, for the U.S. economy, for the period 1960-2004.

Cyclical unemployment vs. the natural rate of unemployment

Cyclical Unemployment vs. the Natural Rate The natural rate of unemployment is the normal rate of unemployment around which the actual unemployment rate fluctuates Unemployment is a serious and complicated problem with a variety of causes. To most effectively address such a problem, we need to break it down and look at each cause separately. We begin by noting that the causes of short-run fluctuations in unemployment are different than the causes of the long-run average unemployment rate, called the “natural rate of unemployment.” The next slide shows data on both, for the U.S. economy, for the period 1960-2004.

Cyclical Unemployment vs. the Natural Rate The cyclical unemployment is the deviation of unemployment from its natural rate associated with business cycles, which are studied in Econ 202! Unemployment is a serious and complicated problem with a variety of causes. To most effectively address such a problem, we need to break it down and look at each cause separately. We begin by noting that the causes of short-run fluctuations in unemployment are different than the causes of the long-run average unemployment rate, called the “natural rate of unemployment.” The next slide shows data on both, for the U.S. economy, for the period 1960-2004.

Natural rate of unemployment U.S. Unemployment Since 1960 Unemployment rate Natural rate of unemployment Cyclical unemployment is the gap between the red and blue lines. When the economy is in recession – the bad part of the business cycle - the actual unemployment rate is higher than the natural rate, and cyclical unemployment is positive. When the economy is in the good part of its business cycle, unemployment is below normal and cyclical unemployment is negative. Source: same as textbook. The unemployment rate comes from the Department of Labor and is available at www.bls.gov. The natural rate of unemployment series is prepared by the Congressional Budget Office. I have not been able to find it at the CBO website (www.cbo.gov). It is available (with tons of other data) at www.economagic.com; paid subscribers can download it in Excel format; others can view it at their site for free. If you find a free source for the CBO’s natural rate series, please let me know! Thanks.

When the economy is in recession – the bad part of the business cycle - the actual unemployment rate is higher than the natural rate, and cyclical unemployment is positive. When the economy is in the good part of its business cycle, unemployment is below normal and cyclical unemployment is negative.

The “natural rate of unemployment” selected countries

Explaining the Natural Rate: An Overview Even when the economy is doing well, there is always some unemployment, including: frictional unemployment occurs when workers spend time searching for the jobs that best suit their skills and tastes short-term for most workers structural unemployment occurs when there are fewer jobs than workers usually longer-term minimum wage laws, trade unions, efficiency wages … In later chapters, we will study short-run economic fluctuations and learn more about the causes and possible cures of cyclical unemployment. For the rest of this chapter, our job is understanding the various causes of the natural rate of unemployment. * * WARNING: If you are teaching with Mankiw for the first time, please note that his definition of structural unemployment may be different than the definition you’ve seen in other textbooks. Other books commonly define structural unemployment as arising from a mismatch between the skills or locations of workers and the skill requirements or locations of jobs. Such textbooks assert that such unemployment results from sectoral shifts. Mankiw’s position is as follows: If all wages were flexible, then they would adjust after structural changes so that all workers with any given skill set in any given location would be employed. The cause of “structural unemployment” therefore cannot be changes in the structure of demand and production; the cause must be wages that fail to adjust following these changes.

Frictional unemployment

Job Search Workers have different tastes & skills, and jobs have different requirements. Job search: the process of matching workers with the right jobs.

Job Search Sectoral shifts: changes in the composition of demand across industries or regions of the country. Such shifts displace some workers, who must search for new jobs appropriate for their skills & tastes. The economy is always changing, so some frictional unemployment is inevitable.

Explaining the natural rate of unemployment Structural Unemployment

Explaining Structural Unemployment Structural unemployment occurs when not enough jobs to go around. W L unemployment S actual wage W1 D WE Occurs when wage is kept above equilibrium. There are three reasons for this… On this graph, WE is the equilibrium wage.

MINIMUM WAGE LAWS When the minimum wage is set above the level that balances supply and demand, it creates unemployment.

Unemployment from a Wage Above the Equilibrium Level Labour supply Surplus of labour = Unemployment Labour demand Minimum wage LD LS WE LE Quantity of Labour

Does min wage cause unemployment? Survey results from 44 US economists:

The panel:

http://www. igmchicago. org/igm-economic-experts-panel/poll-results http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_br0IEq5a9E77NMV

End of the PART 1

http://www.ted.com/talks/hans_rosling_shows_the_best_stats_ you_ve_ever_seen

Production and Growth

Questions What are the facts about living standards and growth rates around the world? What is productivity and why does it matter for living standards? What determines productivity and its growth rate? What can governments do to raise productivity? How can public policy affect growth and living standards?

Imagine a country where Life expectancy at birth < 50 years. More than 95 percent of all births takes place at home. About 1 in 10 children die before their first birthday. Smallpox (çiçek hastalığı), cholera etc. affect the health of citizens. The top three leading causes of death are pneumonia and influenza, tuberculosis, and diarrhea. Only six percent of all citizens graduate from high school. Only 3% of the homes have electricity. Only 15% of homes have indoor flush toilets. 42

Which country is this?

This country is USA in 1900 44

The immense improvement in the living standards and welfare experienced in the US in the last century is the result of sustained long term economic growth. 45

US; per capita GDP, 1900 to 2006

GDP per capita TURKEY in constant 1948 prices Computed from the TUIK publication “İSTATİSTİK GÖSTERGELER” – Statistical Indicators, 1923-2011, TUIK publication number 3890, available on the internet In 1923 GDP per capita was 233TL, In 2011 GDP per capita was 1824TL This is almost an 8 fold increase in 90 years. This is equivalent to a 2,5% constant growth rate per year.

If instead the Turkish economy grew at a slightly higher rate of 3% every year, the GDP in 2011 would be 3150TL. (This is almost the double of the actual 2011 GDP per capita.)

Impact of higher GDP per capita on people’s lives

Life expectancy at birth Hacettepe Universitesi Nufus Etutleri Enstitusu Türkiye’nin Demografik Dönüşümü: Doğurganlık, Aile Planlaması, Anne‐Çocuk Sağlığı ve Beş Yaş Altı Ölümlerdeki Değişimler: 1968‐2008

Literacy (age 6+)

Maternal mortality per 100,000 birth

Infant mortality 1945 – 2008 (per thousands)

Income differences around the world http://econperspectives.blogspot.com/2008_08_01_archive.html

What a typical family eats Hungry Planet: What the World Eats Peter Menzel shows us the big differences in the standard-of-living around the globe by photographing what a typical family eats over the course of a week.

Chad: 2008 GDP per capita = $1,600.

Mexico: 2008 GDP per capita = $14,200

United States: 2008 GDP per capita = $47,000

Material World: A Global Family Portrait by Peter Menzel Material World: A Global Family Portrait by Peter Menzel. The differences in economic growth around the world in photographs: the material possessions of a typical family in various countries.

Mali: The Natomo Family It is not unusual in this West African country for men to have two wives, as 39-year-old Soumana Natomo does. More wives mean more children—and a greater chance you will be supported in old age. Soumana now has eight children, and his wives, Pama Kondo (28) and Fatouma Niangani Toure (26), will likely have more. How many of these children will survive, though, is uncertain: Mali's infant mortality rate ranks among the ten highest in the world. Some of the family's possessions are not included in this photo—another mortar and pestle for pounding grain, two wooden mattress platforms, 30 mango trees, and old radio batteries that the children use as toys. (Note: The Natomos appear on the adobe roof of their house in Kouakourou. An infant son is nestled in his mother's arms. One daughter is absent.) Population: 12 million Total fertility rate: 7.0 children per woman Population doubling time: 23 years Percentage urban/rural: 26% urban, 64% rural Per capita energy use: 22 kg. oil equivalent Infant mortality: 118.7 deaths per 1,000 births Life expectancy: 48 (male), 49 (female) Adult illiteracy: 64% (male), 84% (female) Internet users: 30,000

India: The Yadev Family At age 25, Mashre Yadev is already mother to four children, the oldest of whom was born when she was 17. Each morning at their home in rural Uttar Pradesh, she draws water from a well so that her older children can wash before school. She cooks over a wood fire in a windowless, six-by-nine-foot kitchen, and such labor-intensive domestic work keeps her busy from dawn to dusk. Her husband Bachau, 32, works roughly 56 hours a week, when he can find work. In rough times, family members have gone more than two weeks with little food. Everything they own—including two beds, three bags of rice, a broken bicycle, and their most cherished belonging, a print of Hindu gods—appears in this photograph. Population: 1.0 billion Population density: 318 people per sq. km. Total fertility rate: 3.0 children per woman Population doubling time: 36 years Percentage urban/rural: 28% urban, 72% rural Per capita energy use: 494 kg. oil equivalent Infant mortality: 66 deaths per 1,000 births Life expectancy: 62 (male), 64 (female) Adult illiteracy: 32% (male), 55% (female) Internet users: 7 million

United States: The Skeen Family

Rick and Pattie Skeen's 1,600-square-foot house lies on a cul-de-sac in Pearland, Texas, a suburb of Houston. The fire hydrant in this photo is real, but not working—a souvenir from Rick's days as a firefighter. Rick, 36, now splices cables for a phone company. Pattie, 34, teaches school at a Christian academy. To get the picture, photographers hoisted the family up in a cherry picker. Yet the image still leaves out a refrigerator-freezer, camcorder, woodworking tools, computer, glass butterfly collection, trampoline, fishing equipment, and the rifles Rick uses for deer hunting, among other things. Though rich with possessions, nothing is as important to the Skeens as their Bible. For this devoutly Baptist family, like many families around the world, it is a spiritual—rather than material—life that matters most. Population: 292 million Population density: 29 people per sq. km. Total fertility rate: 2.0 children per woman Population doubling time: 116 years Percentage urban/rural: 78% urban, 22% rural Per capita energy use: 8,148 kg. oil equivalent Infant mortality: 6.7 deaths per 1,000 births Life expectancy: 74 (male), 80 (female) Adult illiteracy: 3% (male), 3% (female) Internet users: 165 million

China: The Wu Family The nine members of this extended family—father Wu Ba Jiu (59), mother Guo Yu Xian (57), their sons, daughters-in-law, and three grandchildren—live in a three-bedroom, 600-square-foot dwelling in rural Yunnan Province. While they have no telephone, they get news and images of a wider world through two radios and the family's most prized possession, a television. In the future, they hope to get one with a 30-inch screen as well as a VCR, a refrigerator, and drugs to combat diseases in the carp they raise in their ponds. Not included in the photo are their 100 mandarin trees, vegetable patch, and three pigs. Population: 1.3 billion Population density: 627 people per sq. km. Total fertility rate: 1.7 children per woman Population doubling time: 67 years Percentage urban/rural: 37% urban, 63% rural Per capita energy use: 905 kg. oil equivalent Infant mortality: 32 deaths per 1,000 births Life expectancy: 69 (male), 73 (female) Adult illiteracy: 7.9% (male), 22.1% (female) Internet users: 46 million

Japan: The Ukita Family Like many Japanese women, 43-year-old Sayo Ukita had children relatively late in life. Her youngest daughter is now in kindergarten, not yet burdened by the pressures of exams and Saturday "cram school" that face her nine-year-old sister. Sayo is supremely well-organized, which helps her manage the busy schedules of her children and maintain order in their 1,421-square-foot Tokyo home stuffed with clothes, appliances, and an abundance of toys for both her daughters and dog. She and her husband Kazuo, 45, have all the electronic and gas-powered conveniences of modern life, but their most cherished possessions are a ring and heirloom pottery. The family's wish for the future: a larger house with more storage space. Population: 128 million Population density: 336 people per sq. km. Total fertility rate: 1.3 children per woman Population doubling time: 289 years Percentage urban/rural: 79% urban, 21% rural Per capita energy use: 4,316 kg. oil equivalent Infant mortality: 3 deaths per 1,000 births Life expectancy: 78 (male), 85 (female) Adult illiteracy: 1% (male), 1% (female) Internet users: 56 million

GDP, The big ten

GDP, The second big ten

So then… Economic prosperity, as measured by GDP per person, varies substantially around the world. The average income in the world’s richest countries is more than ten times that in the world’s poorest countries. Because growth rates of real GDP also vary substantially, the relative positions of countries can change dramatically over time.

Incomes and Growth Around the World GDP per capita, 2009 Growth rate, 1970–2009 China $6,828 7.4% Singapore $50,633 4.7% India $3,296 3.3% Japan $32,418 2.2% Spain $32,150 2.1% Israel $27,656 Colombia $8,959 1.9% United States $45,989 1.8% Canada $37,808 1.7% Philippines $3,542 1.3% Rwanda $1,136 1.1% New Zealand $28,993 Argentina $14,538 1.0% Saudi Arabia $23,480 0.6% Chad $1,300 0.4% FACT 1: There are big differences in living standards around the world. 73

Incomes and Growth Around the World GDP per capita, 2009 Growth rate, 1970–2009 China $6,828 7.4% Singapore $50,633 4.7% India $3,296 3.3% Japan $32,418 2.2% Spain $32,150 2.1% Israel $27,656 Colombia $8,959 1.9% United States $45,989 1.8% Canada $37,808 1.7% Philippines $3,542 1.3% Rwanda $1,136 1.1% New Zealand $28,993 Argentina $14,538 1.0% Saudi Arabia $23,480 0.6% Chad $1,300 0.4% FACT 2: There is great variation in growth rates across countries. 74

First question! Roughly speaking, the ratio of incomes per capita for the richest and poorest countries on the preceding slide was Fifty to one Twenty to one Ten to one Five to one

Second question!! Roughly speaking, the range of annual growth rates in income per capita for the countries on the preceding slide was from 3 to 6 percent 0 to 7 percent 2 to 5 percent 0 to 2 percent

Economic growth: the last 2000 years

Until 1500, there had been almost zero growth of output per worker. After 1800, we see large sustained increases in worldwide standards of living. population growth accelerated output per capita grew

LONG TERM Economic Growth

World GDP selected years

Angus Maddison (1926-2010) was a British economist and a world scholar on quantitative macroeconomic history, including the measurement and analysis of economic growth and development for different regions, and time periods. http://www.ggdc.net/maddison/maddison-project/home.htm

End of this part

What determines a country’s standard of living?